##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
  FORM 10-Q
  (Mark One)  þ
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended March 31, 2005 or  o
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the transition period from __________ to __________ Commission File No. 000-25805 Fauquier Bankshares, Inc.  Virginia
(State or other jurisdiction of incorporation or organization)
    
    54-1288193
(I.R.S. Employer Identification No.)
 10 Courthouse Square
Warrenton, Virginia
(Address of principal executive offices)
    
    20186
(Zip Code)
 (540) 347-2700 (Registrants telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No o Indicate by check mark whether the registrant is an accelerated filer (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ As of May 5, 2005, the latest practicable date for determination, 3,434,849 shares of
common stock, par value $3.13 per share, of the registrant were outstanding.




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##### 



FAUQUIER BANKSHARES, INC. INDEX PagePart I. FINANCIAL INFORMATION
    
    
    2Item 1. Financial StatementsConsolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004
    
    
    2Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2005 and 2004
    
    
    3Consolidated Statements of Changes in Shareholders Equity (unaudited) for the Three Months Ended
March 31, 2005 and 2004
    
    
    4Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2005 and 2004
    
    
    5Notes to Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 4. Controls and Procedures
    
    
    23Part II. OTHER INFORMATION
    
    
    24Item 1. Legal Proceedings
    
    
    24Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    25SIGNATURES
    
    
    26




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets Unaudited
    
    
    AuditedMarch 31, 2005
    
    
    December 31, 2004AssetsCash and due from banks
    
    $
    16,581,247
    
    
    $
    8,944,590Interest-bearing deposits in other banks
    
    
    138,755
    
    
    
    112,984Federal funds sold
    
    
    7,292,000
    
    
    
    109,000Securities, at fair value
    
    
    55,561,849
    
    
    
    58,594,905Loans, net of allowance for loan losses of $4,126,422
in 2005 and $4,060,321 in 2004
    
    
    344,010,362
    
    
    
    337,791,782Bank premises and equipment, net
    
    
    8,408,479
    
    
    
    8,533,619Accrued interest receivable
    
    
    1,520,526
    
    
    
    1,507,391Other assets
    
    
    13,926,369
    
    
    
    13,604,948Total assets
    
    $
    447,439,587
    
    
    $
    429,199,219LiabilitiesDeposits:Noninterest-bearing
    
    $
    90,438,227
    
    
    $
    79,222,524Interest-bearing
    
    
    295,180,459
    
    
    
    295,433,173Total deposits
    
    $
    385,618,686
    
    
    $
    374,655,697Federal funds purchased
    
    
    
    
    
    
    Dividends payable
    
    
    
    
    
    
    508,887Federal Home Loan Bank advances
    
    
    23,000,000
    
    
    
    15,000,000Company-obligated mandatorily redeemable capital securities
    
    
    4,124,000
    
    
    
    4,124,000Other liabilities
    
    
    2,162,992
    
    
    
    3,019,571Commitments and contingent liabilities
    
    
    
    
    
    
    Total liabilities
    
    $
    414,905,678
    
    
    $
    397,308,155Shareholders EquityCommon stock, par value, $3.13; authorized 8,000,000 shares;
issued and outstanding, 2005, 3,433,408 shares; 2004, 3,392,580 shares
    
    
    10,746,567
    
    
    
    10,618,775Retained earnings
    
    
    22,349,195
    
    
    
    21,320,223Accumulated other comprehensive income(loss), net
    
    
    (561,853
    )
    
    
    (47,934
    )Total shareholders equity
    
    $
    32,533,909
    
    
    $
    31,891,064Total liabilities and shareholders equity
    
    $
    447,439,587
    
    
    $
    429,199,219
 See accompanying Notes to Consolidated Financial Statements. 2




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Income
 (Unaudited)
 For the Three Months Ended March 31, 2005 and 2004
 2005
    
    
    2004Interest IncomeInterest and fees on loans
    
    $
    5,329,831
    
    
    $
    4,724,872Interest and dividends on securities available for sale:Taxable interest income
    
    
    506,745
    
    
    
    344,797Interest income exempt from federal income taxes
    
    
    13,082
    
    
    
    14,448Dividends
    
    
    26,731
    
    
    
    16,022Interest on federal funds sold
    
    
    7,151
    
    
    
    21Interest on deposits in other banks
    
    
    1,521
    
    
    
    6,727Total interest income
    
    
    5,885,061
    
    
    
    5,106,887Interest ExpenseInterest on deposits
    
    
    1,039,386
    
    
    
    731,654Interest on federal funds purchased
    
    
    25,430
    
    
    
    31,319Interest on Federal Home Loan Bank advances
    
    
    203,538
    
    
    
    210,880Distribution on capital securities of subsidiary trust
    
    
    61,788
    
    
    
    48,230Total interest expense
    
    
    1,330,142
    
    
    
    1,022,083Net interest income
    
    
    4,554,919
    
    
    
    4,084,804Provision for loan losses
    
    
    125,000
    
    
    
    154,167Net interest income after
provision for loan losses
    
    
    4,429,919
    
    
    
    3,930,637Other incomeWealth management income
    
    
    317,701
    
    
    
    324,689Service charges on deposit accounts
    
    
    641,125
    
    
    
    598,604Other service charges, commissions and fees
    
    
    295,617
    
    
    
    334,454Other operating income
    
    
    7,969
    
    
    
    730Total other income
    
    
    1,262,412
    
    
    
    1,258,477Other ExpensesSalaries and benefits
    
    
    2,057,922
    
    
    
    1,887,032Net occupancy expense of premises
    
    
    233,070
    
    
    
    211,764Furniture and equipment
    
    
    317,287
    
    
    
    299,392Other operating expenses
    
    
    1,211,212
    
    
    
    1,278,955Total other expenses
    
    
    3,819,491
    
    
    
    3,677,143Income before income taxes
    
    
    1,872,840
    
    
    
    1,511,971Income tax expense
    
    
    562,572
    
    
    
    442,034Net Income
    
    $
    1,310,268
    
    
    $
    1,069,937Earnings per Share, basic
    
    $
    0.38
    
    
    $
    0.32Earnings per Share, assuming dilution
    
    $
    0.37
    
    
    $
    0.30Dividends per Share
    
    $
    0.15
    
    
    $
    0.13
 See accompanying Notes to Consolidated Financial Statements. 3




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Changes in Shareholders Equity
 (Unaudited)
 For the Three Months Ended March 31, 2005 and 2004
 AccumulatedOtherCommon
    
    
    Retained
    
    
    Comprehensive
    
    
    ComprehensiveStock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Income
    
    
    TotalBalance, December 31, 2003
    
    $
    10,367,280
    
    
    $
    18,082,684
    
    
    $
    12,821
    
    
    
    
    
    
    $
    28,462,785Comprehensive income:Net income
    
    
    
    
    
    
    1,069,937
    
    
    
    
    
    
    $
    1,069,937
    
    
    
    1,069,937Other comprehensive income net of tax:Unrealized holding gain on securities available
for sale, net of deferred income taxes of $141,758
    
    
    
    
    
    
    
    
    
    
    275,177
    
    
    
    275,177
    
    
    
    275,177Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,345,114
    
    
    
    Cash dividends ($.13 per share)
    
    
    
    
    
    
    (431,248
    )
    
    
    
    
    
    
    
    
    
    
    (431,248
    )Acquisition of 11,400 shares of common stock
    
    
    (35,682
    )
    
    
    (229,062
    )
    
    
    
    
    
    
    
    
    
    
    (264,744
    )Net issuance of restricted stock, stock incentive plan
(12,557 shares)
    
    
    39,304
    
    
    
    274,622
    
    
    
    
    
    
    
    
    
    
    
    313,926Unearned compensation on restricted stock
    
    
    
    
    
    
    (313,925
    )
    
    
    
    
    
    
    
    
    
    
    (313,925
    )Amortization of unearned compensation, restricted stock awards
    
    
    
    
    
    
    12,181
    
    
    
    
    
    
    
    
    
    
    
    12,181Exercise of stock options
    
    
    12,213
    
    
    
    19,510
    
    
    
    
    
    
    
    
    
    
    
    31,723Balance, March 31, 2004
    
    $
    10,383,115
    
    
    $
    18,484,699
    
    
    $
    287,998
    
    
    
    
    
    
    $
    29,155,812Balance, December 31, 2004
    
    $
    10,618,775
    
    
    $
    21,320,223
    
    
    $
    (47,934
    )
    
    
    
    
    
    
    31,891,064Comprehensive income:Net income
    
    
    
    
    
    
    1,310,268
    
    
    
    
    
    
    $
    1,310,268
    
    
    
    1,310,268Other comprehensive income net of tax:Unrealized holding losses on securities available
for sale, net of deferred income taxes of $265,746
    
    
    
    
    
    
    
    
    
    
    (513,919
    )
    
    
    (513,919
    )
    
    
    (513,919
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    796,349
    
    
    
    Cash dividends ($.15 per share)
    
    
    
    
    
    
    (515,011
    )
    
    
    
    
    
    
    
    
    
    
    (515,011
    )Restricted stock forfeiture
    
    
    (3,506
    )
    
    
    (24,494
    )
    
    
    
    
    
    
    
    
    
    
    (28,000
    )Net issuance of restricted stock, stock incentive plan
(10,045 shares)
    
    
    31,441
    
    
    
    218,077
    
    
    
    
    
    
    
    
    
    
    
    249,518Unearned compensation on restricted stock
    
    
    
    
    
    
    (249,518
    )
    
    
    
    
    
    
    
    
    
    
    (249,518
    )Amortization of unearned compensation, restricted stock awards
    
    
    
    
    
    
    98,127
    
    
    
    
    
    
    
    
    
    
    
    98,127Issuance of common stock
    
    
    4,301
    
    
    
    29,658
    
    
    
    
    
    
    
    
    
    
    
    33,959Exercise of stock options
    
    
    95,556
    
    
    
    161,865
    
    
    
    
    
    
    
    
    
    
    
    257,421Balance, March 31, 2005
    
    $
    10,746,567
    
    
    $
    22,349,195
    
    
    $
    (561,853
    )
    
    
    
    
    
    $
    32,533,909
 See accompanying Notes to Consolidated Financial Statements. 4




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##### 



Fauquier Bankshares, Inc. and Subsidiaries
 Consolidated Statements of Cash Flows
 (Unaudited)
 For the Three Months Ended March 31, 2005 and 2004
 2005
    
    
    2004Cash Flows from Operating ActivitiesNet income
    
    $
    1,310,268
    
    
    $
    1,069,937Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation and amortization
    
    
    294,362
    
    
    
    269,189Provision for loan losses
    
    
    125,000
    
    
    
    154,167(Gain) on sale of premises and equipment
    
    
    
    
    
    
    (485
    )Amortization of security premiums, net
    
    
    19,930
    
    
    
    107,202Amortization of unearned compensation
    
    
    98,127
    
    
    
    Changes in assets and liabilities:(Increase) in other assets
    
    
    (69,810
    )
    
    
    (77,259
    )(Decrease) in other liabilities
    
    
    (856,579
    )
    
    
    (231,030
    )Net cash provided by operating activities
    
    
    921,298
    
    
    
    1,291,721Cash Flows from Investing ActivitiesProceeds from maturities, calls and principal
payments of securities available for sale
    
    
    2,850,255
    
    
    
    5,237,204Purchase of securities available for sale
    
    
    (255,794
    )
    
    
    (500,000
    )Proceeds from sale of premises and equipment
    
    
    
    
    
    
    485Purchase of premises and equipment
    
    
    (169,222
    )
    
    
    (626,193
    )Purchase of other investment
    
    
    (360,000
    )
    
    
    Net (increase) in loans
    
    
    (6,343,580
    )
    
    
    (13,944,478
    )Net cash (used in) investing activities
    
    
    (4,278,341
    )
    
    
    (9,832,982
    )Cash Flows from Financing ActivitiesNet increase in demand deposits, NOW accounts
and savings accounts
    
    
    5,120,612
    
    
    
    16,780,794Net increase in certificates of deposit
    
    
    5,842,377
    
    
    
    2,154,021Proceeds from issuance of capital securitiesFederal Home Loan Bank advances
    
    
    8,000,000
    
    
    
    9,000,000Federal Home Loan Bank principal repayments
    
    
    
    
    
    
    (2,000,000
    )Cash dividends paid
    
    
    (1,023,898
    )
    
    
    (430,590
    )Issuance of common stock
    
    
    291,380
    
    
    
    43,905Acquisition of common stock
    
    
    (28,000
    )
    
    
    (264,744
    )Net cash provided by financing activities
    
    
    18,202,471
    
    
    
    25,283,386Increase (decrease) in cash and cash
equivalents
    
    
    14,845,428
    
    
    
    16,742,125Cash and Cash EquivalentsBeginning
    
    
    9,166,574
    
    
    
    11,950,429Ending
    
    $
    24,012,002
    
    
    $
    28,692,554Supplemental Disclosures of Cash Flow InformationCash payments for:Interest
    
    $
    1,291,297
    
    
    $
    1,019,052Income taxes
    
    $
    
    
    
    $
    Supplemental Disclosures of Noncash Investing ActivitiesUnrealized gain (loss) on securities available for sale, net
    
    $
    (779,665
    )
    
    $
    416,935
 See accompanying Notes to Consolidated Financial Statements. 5




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##### 



FAUQUIER BANKSHARES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements  1.
    GeneralThe consolidated statements include the accounts of Fauquier
Bankshares, Inc. (the Corporation, Bankshares) and its wholly-owned subsidiaries,
Fauquier Statutory Trust I (Trust I) and The Fauquier Bank (the Bank), of which Fauquier Services, Inc. is its sole subsidiary. In consolidation,
significant intercompany financial balances and transactions have been eliminated. In the opinion of management, the
accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial positions as of March 31, 2005 and December 31, 2004, and the
results of operations and cash flows for the three months ended March 31, 2005 and 2004.The results of operations for the three months ended March 31, 2005 and 2004 are not necessarily indicative of the
results expected for the full year.2.
    SecuritiesThe amortized cost of securities available for sale, with unrealized gains and losses follows: Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueMarch 31, 2005Obligations of U.S.
Government corporations
and agencies
    
    $
    46,734,939
    
    
    $
    18,526
    
    
    $
    (796,228
    )
    
    $
    45,957,237Obligations of states
and political
subdivisions
    
    
    961,652
    
    
    
    52,938
    
    
    
    
    
    
    
    1,014,590Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (101,100
    )
    
    
    5,898,900Mutual Funds
    
    
    259,638
    
    
    
    
    
    
    
    (4,429
    )
    
    
    255,209FHLMC Preferred
Bank stock
    
    
    441,000
    
    
    
    
    
    
    
    (21,000
    )
    
    
    420,000Restricted investments:Federal Home Loan
Bank stock
    
    
    1,791,800
    
    
    
    
    
    
    
    
    
    
    
    1,791,800Federal Reserve Bank
stock
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Community Bankers
Bank stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    102,113
    
    
    
    
    
    
    
    
    
    
    
    102,113$
    56,413,142
    
    
    $
    71,464
    
    
    $
    (922,757
    )
    
    $
    55,561,849
 6




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##### 



Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    FairCost
    
    
    Gains
    
    
    (Losses)
    
    
    ValueDecember 31, 2004Obligations of U.S.
Government corporations
and agencies
    
    $
    49,352,582
    
    
    $
    175,475
    
    
    $
    (238,296
    )
    
    $
    49,289,761Obligations of states
and political
subdivisions
    
    
    961,515
    
    
    
    60,037
    
    
    
    
    
    
    
    1,021,552Corporate Bonds
    
    
    6,000,000
    
    
    
    
    
    
    
    (68,750
    )
    
    
    5,931,250Mutual Funds
    
    
    256,524
    
    
    
    
    
    
    
    (1,095
    )
    
    
    255,429FHLMC Preferred
Bank stock
    
    
    441,000
    
    
    
    
    
    
    
    
    
    
    
    441,000Restricted investments:Federal Home Loan
Bank stock
    
    
    1,431,800
    
    
    
    
    
    
    
    
    
    
    
    1,431,800Federal Reserve Bank
stock
    
    
    72,000
    
    
    
    
    
    
    
    
    
    
    
    72,000Community Bankers
Bank stock
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    50,000The Bankers Bank Stock
    
    
    102,113
    
    
    
    
    
    
    
    
    
    
    
    102,113$
    58,667,534
    
    
    $
    235,512
    
    
    $
    (308,141
    )
    
    $
    58,594,905
 The amortized cost and fair value of securities available for sale, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because issuers may have the right to call or prepay
obligations without penalties. March 31, 2005Amortized
    
    
    FairCost
    
    
    ValueDue in one year or less
    
    $
    654
    
    
    $
    660Due after one year through five years
    
    
    20,955,541
    
    
    
    20,543,995Due after five years through ten years
    
    
    3,889,497
    
    
    
    3,804,209Due after ten years
    
    
    28,850,899
    
    
    
    28,521,863Equity securities
    
    
    2,716,551
    
    
    
    2,691,122$
    56,413,142
    
    
    $
    55,561,849
 7




---



##### 



The following table shows the Corporations investments with gross
unrealized losses and their fair value, aggregated by investment category and
the length of time that individual securities have been in a continuous
unrealized loss position, at March 31, 2005. Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedDescription of Securities
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)
    
    
    Fair Value
    
    
    (Losses)Obligations
of U.S. government corporations and agencies
    
    $
    42,560,365
    
    
    $
    (760,654
    )
    
    $
    1,838,724
    
    
    $
    (35,574
    )
    
    $
    44,399,089
    
    
    $
    (796,228
    )Corporate bonds
    
    
    4,941,400
    
    
    
    (58,600
    )
    
    
    957,500
    
    
    
    (42,500
    )
    
    
    5,898,900
    
    
    
    (101,100
    )Subtotal, debt securities
    
    
    47,501,765
    
    
    
    (819,254
    )
    
    
    2,796,224
    
    
    
    (78,074
    )
    
    
    50,297,989
    
    
    
    (897,328
    )Preferred Stock
    
    
    441,000
    
    
    
    (21,000
    )
    
    
    
    
    
    
    
    
    
    
    441,000
    
    
    
    (21,000
    )Mutual Fund
    
    
    259,638
    
    
    
    (4,429
    )
    
    
    
    
    
    
    
    
    
    
    259,638
    
    
    
    (4,429
    )Total temporary impaired
securities
    
    $
    48,202,403
    
    
    $
    (844,683
    )
    
    $
    2,796,224
    
    
    $
    (78,074
    )
    
    $
    50,998,627
    
    
    $
    (922,757
    )
  The nature of the securities which are temporarily impaired for a continuous 12 months or more can be segmented into two groups.
The first group consists of two Federal Agency bonds totaling $1.8 million with a temporary loss of approximately $35,574. Both
bonds within this group have Aaa/AAA ratings from Moodys and
Standard & Poors. These bonds have estimated
maturity dates of five months and 47 months, and return principal on a monthly basis representing the repayment and prepayment
of the underlying mortgages. The Corporation has the ability to hold these bonds to their maturity.The second group consists of one corporate bond, rated A2 by Moodys, totaling $1.0 million with a temporary loss of approximately
$42,500. This bond has a remaining maturity of approximately 29 years, but can be called at par on its five year anniversary. If not
called, the bond reprices, every three months at a fixed index above LIBOR. The Corporation has the ability to hold this bond to its maturity.The carrying value of securities pledged to secure deposits and for other purposes amounted to $9,364,247 and $9,695,444 at
March 31, 2005 and December 31, 2004, respectively.3.
    LoansA summary of the balances of loans follows: March 31,
    
    
    December 31,2005
    
    
    2004(Thousands)Real estate loans:Construction
    
    $
    28,867
    
    
    $
    29,270Secured by farmland
    
    
    564
    
    
    
    965Secured by 1-4 family residential
    
    
    140,653
    
    
    
    136,165Other real estate loans
    
    
    97,631
    
    
    
    100,757Commercial and industrial loans (except those secured by real estate)
    
    
    31,953
    
    
    
    24,036Consumer installment loans
    
    
    39,683
    
    
    
    41,088All other loans
    
    
    9,235
    
    
    
    9,941Total loans
    
    $
    348,586
    
    
    $
    342,222Unearned income
    
    
    (450
    )
    
    
    (370
    )Allowance for loan losses
    
    
    4,126
    
    
    
    4,060Net loans
    
    $
    344,010
    
    
    $
    337,792
 Analysis of the allowance for loan losses follows: Three Months
    
    
    Three Months
    
    
    Twelve MonthsEnded
    
    
    Ended
    
    
    EndedMarch 31,
    
    
    March 31,
    
    
    December 31,2005
    
    
    2004
    
    
    2004Balance at beginning of period
    
    $
    4,060,321
    
    
    $
    3,575,002
    
    
    $
    3,575,002Provision charged to operating expense
    
    
    125,000
    
    
    
    154,167
    
    
    
    539,583Recoveries added to the allowance
    
    
    15,173
    
    
    
    6,283
    
    
    
    300,830Loan losses charged to the allowance
    
    
    (74,072
    )
    
    
    (30,790
    )
    
    
    (355,094
    )Balance at end of period
    
    $
    4,126,422
    
    
    $
    3,704,662
    
    
    $
    4,060,321
 Non-performing assets consist of the following: March 31,
    
    
    December 31,2005
    
    
    2004(Thousands)Nonaccrual loans
    
    $
    200
    
    
    $
    62Restructured loans
    
    
    
    
    
    
    Total non-performing loans
    
    
    200
    
    
    
    62Foreclosed property
    
    
    178
    
    
    
    121Total non-performing assets
    
    $
    378
    
    
    $
    183
  Total loans past due 90 days or more and still accruing interest totaled $271,000 on March 31, 2005 and
$162,000 on December 31, 2004, respectively. 8




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##### 



4.
    Company-Obligated Mandatorily Redeemable Capital Securities of Subsidiary TrustOn March 26, 2002, Bankshares wholly-owned Connecticut statutory business trust privately issued $4 million face amount
of the trusts Floating Rate Capital Securities (Capital Securities) in a pooled capital securities offering. Simultaneously, the
trust used the proceeds of that sale to purchase $4 million principal amount of the Bankshares Floating Rate Junior Subordinated
Deferrable Interest Debentures due 2032 (Subordinated Debentures). Both the Capital Securities and the Subordinated Debentures
are callable at any time after five years from the issue date. The Subordinated Debentures are an unsecured obligation of the
Bankshares and are junior in right of payment to all present and future senior indebtedness of the Bankshares. The Capital Securities
are guaranteed by the Bankshares on a subordinated basis.

The Capital Securities are presented in the consolidated balance sheets of the Bankshares under the caption Company-Obligated
Mandatorily Redeemable Capital Securities. Bankshares records distributions payable on the Capital Securities as an Interest
Expense in its consolidated statements of income. The cost of issuance of the Capital Securities was approximately $128,000.
This cost is being amortized over a five year period from the issue date.5.
    Earnings Per ShareThe following table shows the weighted average number of shares used in computing earnings per share and the
effect on weighted average number of shares of dilutive potential common stock. Dilutive potential common stock
had no effect on income available to common shareholders. Three Months
    
    
    Three MonthsEnded
    
    
    EndedMarch 31, 2005
    
    
    March 31, 2004Per Share
    
    
    
    
    
    
    Per ShareShares
    
    
    Amount
    
    
    Shares
    
    
    AmountBasic earnings per share
    
    
    3,404,113
    
    
    $
    0.38
    
    
    
    3,317,289
    
    
    $
    0.32Effect of dilutive securities, stock options
    
    
    130,153
    
    
    
    
    
    
    
    209,869Diluted earnings per share
    
    
    3,534,266
    
    
    $
    0.37
    
    
    
    3,527,158
    
    
    $
    0.30
  6.
    Stock-Based CompensationAt March 31, 2005, the
Corporation has a stock-based
compensation plan. The
Corporation accounts for the
plan under the recognition
and measurement principles of
APB Opinion 25, Accounting
for Stock Issued to
Employees,and related
interpretations. No
stock-based employee
compensation cost is
reflected in net income, as
all options granted under the
plan had an exercise price
equal to the market value of
the underlying common stock
on the date of the grant.
The following table
illustrates the effect on net
income and earnings per share
for Bankshares had the fair
value recognition provisions
of FASB Statement No. 123,
Accounting for Stock-Based
Compensation, been applied to
stock-based compensation. March 31,
    
    
    March 31,2005
    
    
    2004Net income, as reported
    
    $
    1,310,268
    
    
    $
    1,069,937Deduct: total stock-based employee compensation
expense determined based on fair value
method of awards, net of tax
    
    
    (13,815
    )
    
    
    (21,097
    )Pro forma net income
    
    $
    1,296,453
    
    
    $
    1,048,840Earnings per share:Basic  as reported
    
    $
    0.38
    
    
    $
    0.32Basic  pro forma
    
    $
    0.38
    
    
    $
    0.32Diluted  as reported
    
    $
    0.37
    
    
    $
    0.30Diluted  pro forma
    
    $
    0.37
    
    
    $
    0.30
 9




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##### 



7.
    Employee Benefit PlanThe following table provides a reconciliation of the changes in
the defined benefit pension plans obligations for the periods
ended March 31, 2005 and 2004. Three Months EndedMarch 31,2005
    
    
    2004Service cost
    
    $
    143,620
    
    
    $
    113,959Interest cost
    
    
    85,120
    
    
    
    101,423Expected return on plan assets
    
    
    (75,429
    )
    
    
    (98,287
    )Amortization of transition obligation/(asset)
    
    
    (4,745
    )
    
    
    (4,745
    )Amortization of prior service cost
    
    
    1,942
    
    
    
    1,942Recognized net actuarial (gain)/loss
    
    
    15,578
    
    
    
    9,839Net periodic benefit cost
    
    $
    166,086
    
    
    $
    124,131
  The Corporation previously disclosed in its financial statements for the year ended December 31,
2004, that it expected to contribute $1,186,714 to its pension plan in 2005. As of March 31, 2005,
contributions totaling $1,186,714 have been made. The Corporation presently anticipates no
additional contributions to fund its pension plan in 2005. 10




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##### 



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION In addition to the historical information contained herein, this report contains
forward-looking statements. Forward-looking statements are based on certain assumptions and
describe future plans, strategies, and expectations of management, and are generally
identifiable by use of the words believe, expect, intend, anticipate, estimate,
project, may, will or
similar expressions. Although we believe our plans, intentions and expectations reflected in
these forward-looking statements are reasonable, we can give no assurance that these plans,
intentions, or expectations will be achieved. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain, and actual results could
differ materially from those
contemplated. Factors that could have a material adverse effect on our operations and future
prospects include, but are not limited to, changes in:  
    interest rates,
    general economic conditions,
    the legislative/regulatory climate,
    monetary and fiscal policies of the U.S. Government, including the policies of
the U.S. Treasury and the Board of Governors of the Federal Reserve System,
    the quality or composition of The Fauquier Banks (TFB) loan or investment
portfolios,
    competition,
    demand for financial products and services in our market area,
    accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements
in this report, and you should not place undue reliance on such statements, which reflect
our position as of the date of this report. GENERAL Fauquier Bankshares, Inc. (Bankshares) was incorporated under the laws of the Commonwealth
of Virginia on January 13, 1984. Bankshares is a registered bank holding company and owns
all of the voting shares of TFB, a Virginia state-chartered bank that commenced operations
in 1902. Bankshares engages in its business through TFB, and has no significant operations
other than owning the stock of TFB. Bankshares had issued and outstanding 3,433,408 shares of common
stock, par value $3.13 per share, held by approximately 389 holders of record on March 31,
2005. TFB has eight full service branch offices located in the Virginia communities of Warrenton,
Catlett, The Plains, New Baltimore, Sudley Road-Manassas, Old Town-Manassas and Bealeton.
The executive offices of Bankshares and the main office of TFB are located at 10 Courthouse
Square, Warrenton, Virginia 20186. During the March 2005 quarter, TFB signed a lease for
its ninth full service branch in Haymarket, Virginia, scheduled to open in 2006. TFBs
general market area principally includes Fauquier County, western Prince William County, and
neighboring communities and is located approximately fifty (50) miles southwest of
Washington, D.C. 11




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##### 



TFB provides a range of consumer and commercial banking services to individuals and
businesses. The deposits of TFB are insured up to applicable limits by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation (the FDIC). The basic services offered
by TFB include: demand deposit accounts, savings and money market deposit accounts, NOW
accounts, time deposits, safe deposit services, credit cards, cash management, automated
clearing house services (ACH) including direct deposits, notary services, night
depository, travelers checks, cashiers checks, domestic collections, savings bonds,
automated teller services, drive-in tellers, internet banking, banking by telephone, and
banking by mail. In addition, TFB makes secured and unsecured commercial and real estate
loans, issues stand-by letters of credit and grants available credit for installment,
unsecured and secured personal loans, residential mortgages and home equity loans, as well
as automobile and other types of consumer financing. TFB provides automated teller machine
(ATM) cards, as a part of the Star and Plus ATM networks, thereby permitting customers to
utilize the convenience of larger ATM networks. TFB operates a Wealth Management Services (WMS) division that began with the granting of
trust powers to TFB in 1919. The WMS division provides personalized services that include
investment management, trust, estate settlement, retirement, insurance, and brokerage
services. TFB, through its subsidiary Fauquier Bank Services, Inc., has equity ownership
interests in Bankers Insurance, LLC, a Virginia independent insurance company, and Bankers
Investments Group, LLC, a full service broker/dealer. Bankers Insurance consists of a
consortium of 61 Virginia community bank owners, and Bankers Investments Group is owned by
32 Virginia community banks. The revenues of TFB are derived primarily from interest and fees earned on real estate and
other loans; interest and dividends from investment and mortgage-backed securities; and fees
on deposit products and WMS services. The principal sources of funds for TFBs lending
activities are its deposits, repayment of loans, the sale and maturity of investment
securities, and borrowings from the Federal Home Loan Bank (FHLB) of Atlanta and other
banks. The principal expenses of TFB are the interest paid on deposits and borrowings, and
operating and general administrative expenses. As is the case with banking institutions
generally, TFBs operations are materially and significantly influenced by general economic
conditions and by related monetary and fiscal policies of financial institution regulatory
agencies, including the Board of Governors of the Federal Reserve System (Federal
Reserve). As a Virginia-chartered bank and a member of the Federal Reserve, TFB is
supervised and examined by the Federal Reserve and the Virginia State Corporation Commission
(SCC). Interest rates on competing investments and general market rates of interest
influence deposit flows and costs of funds. Lending activities are affected by the demand
for financing of real estate and other types of loans, which in turn is affected by the
interest rates at which such financing may be offered and other factors affecting local demand and availability of funds. TFB faces strong competition in
the attraction of deposits, its primary source of lendable funds, and in the origination of
loans. CRITICAL ACCOUNTING POLICIES GENERAL.Bankshares financial statements are prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The financial information
contained within our statements is, to a significant extent, based on measures of the
financial effects of transactions and events that have already occurred. A variety of
factors could affect the ultimate value that is obtained either when earning income,
recognizing an expense, recovering an asset or relieving a liability. We use historical loss
factors as one factor in determining the inherent loss that may be present in our loan
portfolio. Actual losses could differ significantly from the historical factors that we use
in our estimates. In addition, GAAP itself may change from one previously acceptable
accounting method to another method. Although the economics of our transactions would be the
same, the timing of events that would impact our transactions could change. 12




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##### 



ALLOWANCE FOR LOAN LOSSES.The allowance for loan losses is an estimate of the losses that
may be sustained in our loan portfolio. The allowance is based on two basic principles of
accounting: (i) Statement of Financial Accounting Standards (SFAS) No. 5 Accounting for
Contingencies, which requires that losses be accrued when they are probable of occurring
and estimable and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, which
requires that losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the secondary market and
the loan balance. Our allowance for loan losses has three basic components: the specific
allowance, the formula allowance and the unallocated allowance. Each of these components is
determined based upon estimates that can and do change when the actual events occur. The
specific allowance is used to individually allocate an allowance for larger balance,
non-homogeneous loans. The specific allowance uses various techniques to arrive at an
estimate of loss. First, analysis of the borrowers overall financial condition, resources
and payment record, the prospects for support from financial guarantors; and the fair market
value of collateral are used to estimate the probability and severity of inherent losses.
Then the migration of historical default rates and loss severities, internal risk ratings,
industry and market conditions and trends, and other environmental factors are considered.
The use of these values is inherently subjective and our actual losses could be greater or
less than the estimates. The formula allowance is used for estimating the loss on pools of
smaller-balance, homogeneous loans; including 1-4 family mortgage loans, installment loans,
other consumer loans, and outstanding loan commitments. Also, the formula allowance is used
for the remaining pool of larger balance, non-homogeneous loans which were not allocated a
specific allowance upon their review. The formula allowance begins with estimates of
probable losses inherent in the homogeneous portfolio based upon
various statistical analyses. These include analysis of historical and peer group
delinquency and credit loss experience, together with analyses that reflect current trends
and conditions. We also consider trends and changes in the volume and term of loans, changes
in the credit process and/or lending policies and procedures, and an evaluation of overall
credit quality. The formula allowance uses a historical loss view as an indicator of future
losses. As a result, even though this history is regularly updated with the most recent loss
information, it could differ from the loss incurred in the future. The unallocated allowance
captures losses that are attributable to various economic events, industry or geographic
sectors whose impact on the portfolio have occurred but have yet to be recognized in either
the formula or specific allowances. In addition, an unallocated reserve is maintained to
recognize the imprecision in estimating and measuring inherent losses on individual loans or
pools of loans. EXECUTIVE OVERVIEW This discussion is intended to focus on certain financial information regarding
Bankshares and TFB and may not contain all the information that is important to the reader.
The purpose of this discussion is to provide the reader with a more thorough understanding
of our financial statements. As such, this discussion should be read carefully in
conjunction with the consolidated financial statements and accompanying notes contained elsewhere in this report. Through the merger and consolidation of other area banks, TFB has become the primary
independent community bank in its immediate geographic market. TFB continually seeks to be
the principal financial service provider for its market area by providing high quality
customer service, efficient technological support, value-added products, and a strong
commitment to the community. 13




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##### 



Net income of $1.31 million for the quarter ended March 31, 2005 was a 22.5% increase from
the March 2004 quarter net income of $1.07 million. The net income results were consistent
with managements internal projections. Bankshares and TFB have continued to experience
growth across all of the primary operating businesses; specifically, commercial and retail
lending, deposit accounts and core deposits, and assets under WMS management. During the
first quarter of 2003, TFB modified its loan pricing strategies and expanded its loan
product offerings in an effort to increase lending activity without sacrificing the existing
credit quality standards. The result of this effort has been an 11.3% and 36.9% increase in
net loan outstandings from March 31, 2004 to March 31, 2005, and March 31, 2003 to March 31,
2004, respectively. Total deposits increased 13.4% and 20.8% from March 31, 2004 to March
31, 2005, and March 31, 2003 to March 31, 2004, respectively. WMS assets under management
grew to $241.6 million, or an increase of 10%, from March 31, 2004 to March 31, 2005, and
39% from March 31, 2003 to March 31, 2004. Management continues the expansion of its branch network into western Prince William County,
having signed a lease for a full service branch in Haymarket, Virginia, scheduled to open in
2006. Additionally, TFB seeks to add to its branch network in western Prince William County,
as well as Fauquier County, looking toward these new retail markets for growth in deposits
and WMS income. Management also seeks to increase the level of its fee income from deposits
and WMS through the increase of its market share within its current marketplace. During the
March 2005 quarter, the structure of the WMS division was realigned to better serve
customers trust, asset management and investment needs. COMPARISION OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND MARCH 31,
2004 NET INCOME.Net income for the three months ended March 31, 2005 was $1.31 million or $0.37
per diluted share compared with $1.07 million or $0.30 per diluted share for the three
months ended March 31, 2004. The $240,000 or 22.5% increase in net income for the quarter
was fundamentally in-line with management expectations. NET INTEREST INCOME.Net interest income increased $470,000 or 11.5% to $4.55 million for
the three months ended March 31, 2005 compared with $4.08 million for the three months ended
March 31, 2004. The increase in net interest income resulted from increased interest and fee
income on loans as a result of the increase in volume of loans outstanding. The net interest
margin, computed on a tax equivalent basis, for the March 2005 quarter was 4.57%, compared
with 4.55% for the same quarter one year earlier. Average interest-earning assets grew 11.8%
to $404.9 million for the first quarter of 2005 compared with $362.2 million for the first
quarter of 2004. The yield on average interest-earning assets was 5.90% for the March 2005 quarter
compared with 5.67% for the March 2004 quarter. Total interest income increased $778,000 or
15.2% to $5.89 million for the three months ended March 31, 2005, compared with $5.11
million for the three months ended March 31, 2004, as a result of the growth in the volume
of interest-earning assets and in the average rate of interest earned. Interest and
dividends on investment securities increased $171,000 or 44.7%. Investment securities
averaged $57.3 million for the first quarter of 2005 compared with $50.8 million for the
same quarter one year earlier. The yield on investment securities was 3.87% on a tax
equivalent basis for the first quarter of 2005, compared with 3.07% for the first quarter of
2004. Interest and fees on loans increased $605,000 or 12.8% to $5.33 million for the March
2005 quarter compared with the same quarter one year earlier. Average loans outstanding
totaled $346.5 million and earned 6.22% on a tax-equivalent basis for the quarter ended
March 31, 2005, compared with $304.2 million and 6.23%, respectively, for the quarter ended
March 31, 2004. 14




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##### 



Total interest expense increased $308,000 or 30.1% to $1.33 million for the three months
ended March 31, 2005 from $1.02 million for the three months ended March 31, 2004. Average
interest-bearing liabilities grew 10.5% to $321.9 million for the first quarter of 2005
compared with $291.4 million for the first quarter of 2004, while the average cost on
interest-bearing liabilities increased to 1.67% from 1.40% for the same respective time
periods. The increase in total interest expense and the average cost of interest-bearing
liabilities is primarily due to the overall increase in short-term interest rate
environment, as well as the growth in the high balance, premium interest rate NOW account
product first offered in March 2003. The average balance for the premium interest rate NOW
account was $47.4 million with an average cost of 2.21% for the three months ending March
31, 2005, compared with $10.2 million with an average cost of 2.24% for the same three
months in 2004. Average certificates of deposit balances for the first quarter of 2005 were
$81.5 million at an average cost of 2.77%, compared with $77.6 million at an average cost of
2.47% for the same quarter one year earlier. Interest-bearing NOW account deposits averaged
$59.6 million at an average cost of 0.13% for the March 2005 quarter, compared with $55.1
million at an average cost of 0.15% for the March 2004 quarter. Interest-bearing money
market deposits averaged $64.1 million at an average cost of 1.08% for the quarter ended
March 31, 2005, compared with $67.7 million at an average cost of 0.82% for the same quarter
one year earlier. Savings account deposits averaged $42.5 million at an average cost of
0.34% for the March 2005 quarter, compared with $40.3 million at an average cost of 0.37%
for the March 2004 quarter. Average FHLB of Atlanta advances were $18.7 million at an
average cost of 4.35% for the first quarter of 2005, and $26.2 million at an average cost of
3.19% one year earlier. Net interest income is the largest component of net income, and equals the difference
between income generated on interest-earning assets and interest expense incurred on
interest-bearing liabilities. Future trends regarding net interest income are dependent on
the absolute level of market interest rates, the shape of the yield curve, the amount of
lost income from nonperforming assets, the amount of prepaying loans, the mix and amount of
various deposit types, and many other factors, as well as the overall volume of
interest-earning assets. These factors are individually difficult to predict, and when taken
together, the uncertainty of future trends compounds. Based on managements current
projections, net interest income may increase in 2005 and beyond as average interest-earning
assets increase, but this may be offset in part or in whole by a possible contraction in
TFBs net interest margin resulting from competitive market conditions. Additionally, TFBs
balance sheet is positioned for a stable or rising interest rate environment. This means
that net interest income is projected to increase if market interest rates rise, and
decrease if market interest rates fall, all other things being equal. The specific nature of
TFBs variability in net interest income due to changes in interest rates, also known as
interest rate risk, is to a large degree the result of TFBs deposit base structure. During
the first quarter of 2005, demand deposits, non-premium interest rate NOW accounts, and savings deposits averaged
22.2%, 15.7%, and 11.2% of total average deposits, respectively, while the more
interest-rate sensitive time certificates of deposit and premium interest rate NOW account
averaged 21.5 and 12.5% of total average deposits, respectively. The following table sets forth information relating to Bankshares average balance sheet and
reflects the average yield on assets and the average annualized cost of liabilities for the
three month periods ended March 31, 2005 and 2004. These yields and costs are derived by
annualizing the income or expense for the periods presented, and dividing the product of the
annualization by the respective average daily balances of assets and liabilities for the
periods presented. 15




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##### 



AVERAGE BALANCES, INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
(In Thousands) 3 Months Ending March 31, 2005
    
    
    3 Months Ending March 31, 2004Average
    
    
    Income/
    
    
    Average
    
    
    Average
    
    
    Income/
    
    
    AverageBalances
    
    
    Expense
    
    
    Rate
    
    
    Balances
    
    
    Expense
    
    
    RateASSETS:LoansTaxable
    
    $
    339,099
    
    
    $
    5,244
    
    
    
    6.20
    %
    
    $
    294,335
    
    
    $
    4,618
    
    
    
    6.23
    %Tax-exempt (1)
    
    
    7,265
    
    
    
    130
    
    
    
    7.14
    %
    
    
    8,827
    
    
    
    161
    
    
    
    7.23
    %Nonaccrual
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    1,008
    
    
    
    Total Loans
    
    
    346,468
    
    
    
    5,374
    
    
    
    6.22
    %
    
    
    304,170
    
    
    
    4,779
    
    
    
    6.23
    %SecuritiesTaxable
    
    
    56,232
    
    
    
    533
    
    
    
    3.80
    %
    
    
    49,511
    
    
    
    361
    
    
    
    2.97
    %Tax-exempt (1)
    
    
    1,023
    
    
    
    20
    
    
    
    7.75
    %
    
    
    1,241
    
    
    
    22
    
    
    
    7.06
    %Total securities
    
    
    57,255
    
    
    
    553
    
    
    
    3.87
    %
    
    
    50,752
    
    
    
    383
    
    
    
    3.07
    %Deposits in banks
    
    
    93
    
    
    
    2
    
    
    
    6.53
    %
    
    
    7,194
    
    
    
    7
    
    
    
    0.38
    %Federal funds sold
    
    
    1,123
    
    
    
    7
    
    
    
    2.55
    %
    
    
    74
    
    
    
    
    
    
    
    0.11
    %Total earning assets
    
    
    404,939
    
    
    
    5,936
    
    
    
    5.90
    %
    
    
    362,190
    
    
    
    5,169
    
    
    
    5.67
    %Less: Reserve for loan losses
    
    
    (4,053
    )
    
    
    
    
    
    
    
    
    
    
    (3,648
    )Cash and due from banks
    
    
    16,131
    
    
    
    
    
    
    
    
    
    
    
    14,494Bank premises and equipment, net
    
    
    7,491
    
    
    
    
    
    
    
    
    
    
    
    7,492Other assets
    
    
    15,825
    
    
    
    
    
    
    
    
    
    
    
    11,256Total Assets
    
    $
    440,333
    
    
    
    
    
    
    
    
    
    
    $
    391,784LIABILITIES AND SHAREHOLDERS EQUITY:DepositsDemand deposits
    
    $
    84,131
    
    
    
    
    
    
    
    
    
    
    $
    69,601Interest-bearing depositsNOW accounts
    
    
    59,623
    
    
    
    19
    
    
    
    0.13
    %
    
    
    55,054
    
    
    
    21
    
    
    
    0.15
    %Premium NOW accounts
    
    
    47,381
    
    
    
    259
    
    
    
    2.21
    %
    
    
    10,161
    
    
    
    57
    
    
    
    2.24
    %Money market accounts
    
    
    64,134
    
    
    
    171
    
    
    
    1.08
    %
    
    
    67,652
    
    
    
    139
    
    
    
    0.82
    %Savings accounts
    
    
    42,486
    
    
    
    35
    
    
    
    0.34
    %
    
    
    40,279
    
    
    
    37
    
    
    
    0.37
    %Time deposits
    
    
    81,508
    
    
    
    556
    
    
    
    2.77
    %
    
    
    77,610
    
    
    
    478
    
    
    
    2.47
    %Total interest-bearing deposits
    
    
    295,132
    
    
    
    1,040
    
    
    
    1.43
    %
    
    
    250,756
    
    
    
    732
    
    
    
    1.17
    %Federal funds purchased and securities sold
under agreements to repurchase
    
    
    3,934
    
    
    
    25
    
    
    
    2.62
    %
    
    
    10,378
    
    
    
    31
    
    
    
    1.21
    %Federal Home Loan Bank advances
    
    
    18,733
    
    
    
    204
    
    
    
    4.35
    %
    
    
    26,190
    
    
    
    211
    
    
    
    3.19
    %Capital Securities of Subsidiary Trust
    
    
    4,124
    
    
    
    62
    
    
    
    5.99
    %
    
    
    4,124
    
    
    
    48
    
    
    
    4.69
    %Total interest-bearing liabilities
    
    
    321,923
    
    
    
    1,331
    
    
    
    1.67
    %
    
    
    291,448
    
    
    
    1,022
    
    
    
    1.40
    %Other liabilities
    
    
    1,978
    
    
    
    
    
    
    
    
    
    
    
    2,021Shareholders equity
    
    
    32,301
    
    
    
    
    
    
    
    
    
    
    
    28,714Total Liabilities & Shareholders Equity
    
    $
    440,333
    
    
    
    
    
    
    
    
    
    
    $
    391,784Net interest spread
    
    
    
    
    
    $
    4,605
    
    
    
    4.23
    %
    
    
    
    
    
    $
    4,147
    
    
    
    4.27
    %Interest expense as a percent of average
earning assets
    
    
    
    
    
    
    
    
    
    
    1.33
    %
    
    
    
    
    
    
    
    
    
    
    1.13
    %Net interest margin
    
    
    
    
    
    
    
    
    
    
    4.57
    %
    
    
    
    
    
    
    
    
    
    
    4.55
    %
    16




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##### 



RATE/VOLUME ANALYSIS The following table sets forth certain information regarding changes in interest income and
interest expense of Bankshares for the three month periods ended March 31, 2005 and 2004.
For each category of interest-earning asset and interest-bearing liability, information is
provided on changes attributable to changes in volume (change in volume multiplied by the
prior period rate); and changes in rate (change in rate multiplied by the prior period
volume). Changes which cannot be separately identified are allocated proportionately between
changes in volume and changes in rate. RATE / VOLUME VARIANCE
(In Thousands) Three Months Ending March 31, 2005 Compared toThree Months Ending March 31, 2004Due to
    
    
    Due toChange
    
    
    Volume
    
    
    RateINTEREST INCOMELoans; taxable
    
    $
    626
    
    
    $
    683
    
    
    $
    (57
    )Loans; tax-exempt (1)
    
    
    (31
    )
    
    
    (28
    )
    
    
    (3
    )Securities; taxable
    
    
    172
    
    
    
    53
    
    
    
    119Securities; tax-exempt (1)
    
    
    (2
    )
    
    
    (5
    )
    
    
    3Deposits in banks
    
    
    (5
    )
    
    
    
    
    
    
    (5
    )Federal funds sold
    
    
    7
    
    
    
    
    
    
    
    7Total Interest Income
    
    
    767
    
    
    
    703
    
    
    
    64INTEREST EXPENSENOW accounts
    
    
    (2
    )
    
    
    1
    
    
    
    (3
    )Premium NOW
    
    
    202
    
    
    
    203
    
    
    
    (1
    )Money market accounts
    
    
    32
    
    
    
    (7
    )
    
    
    39Savings accounts
    
    
    (2
    )
    
    
    2
    
    
    
    (4
    )Time deposits
    
    
    78
    
    
    
    27
    
    
    
    51Federal funds purchased and securities
sold under agreements to repurchase
    
    
    (6
    )
    
    
    (60
    )
    
    
    54Federal Home Loan Bank Advances
    
    
    (7
    )
    
    
    33
    
    
    
    (40
    )Capital Securities of Subsidiary Trust
    
    
    14
    
    
    
    
    
    
    
    14Total Interest Expense
    
    
    309
    
    
    
    199
    
    
    
    110Net Interest Income
    
    $
    458
    
    
    $
    504
    
    
    $
    (46
    )
    The monitoring and management of net interest income is the responsibility of TFBs
Asset and Liability Management Committee (ALCO). ALCO meets no less than once a month, and
is comprised of TFBs senior management. 17




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##### 



PROVISION FOR LOAN LOSSES.The provision for loan losses was $125,000 and $154,000 for the
three months ended March 31, 2005 and 2004, respectively. The respective amounts of the
provision for loan losses were determined based upon managements continual evaluation of
the
adequacy of the allowance for loan losses, which encompasses the overall risk
characteristics of the loan portfolio, trends in TFBs delinquent and non-performing loans,
estimated values of collateral, and the impact of economic conditions on borrowers. There
can be no assurances, however, that future losses will not exceed estimated amounts, or that
additional provisions for loan losses will not be required in future periods. Please refer
to the section entitled Critical Accounting Policies: Allowance for Loan Losses above for
an explanation of the allowance methodology. TOTAL OTHER INCOME.Total other income increased by $4,000 or 0.3% from $1.258 million for
the three months ended March 31, 2004 to $1.262 million for the three months ended March 31,
2005. Wealth management income decreased $7,000 to $318,000 for the March 2005 quarter
compared with $325,000 for the same quarter one year earlier. Management seeks to increase
the level of its future fee income from WMS through the increase of its market share within
its marketplace. WMS fees are projected to stabilize during the remainder of 2005 and 2006,
and show more moderate growth over the longer term. Service charges on deposit accounts
increased $43,000, or 7.1% to $641,000 for the quarter ended March 31, 2005, compared with
$599,000 for the same quarter one year earlier. Management had projected deposits on service
charges to increase at approximately one-half the rate of growth in average transaction
account deposits, which grew 16.6% from the March 2004 quarter to the March 2005 quarter.
The impact of Check 21 legislation on deposit account service charges during the remainder
of 2005 is difficult to predict. Signed by President Bush on October 28, 2003 and effective
October 28, 2004, the Check Clearing for the 21st Century Act (Check 21) is designed to
facilitate check truncation by authorizing substitute checks, to foster innovation in the
check collection system without mandating receipt of checks in electronic form, and to improve the overall
efficiency of the nations payments system. Over the long term, Check 21 may reduce service
charges on transaction deposit accounts, but may also reduce related operational expenses to
an equal and possibly, greater amount. Income on other service charges, commission and fees
decreased $39,000 or 11.6% to $295,000 for the quarter ended March 31, 2005 compared with
$334,000 one year earlier due to TFBs sale its portfolio of merchant card customers during
the first quarter of 2004. The result of this sale was the reduction of service charge
income of approximately $90,000 per quarter, offset by an approximate $90,000 per quarter
reduction in merchant card operating expenses. TOTAL OTHER EXPENSES.Total other expenses increased 3.9% or $142,000 to $3.82 million
for the three months ended March 31, 2005, compared with $3.68 million for the three months
ended March 31, 2004. The growth in other expenses was slightly less than managements
internal projections of 5% to 6% growth. Salary and benefit expenses increased $171,000, or
9.1% from the March 2004 quarter to the March 2005 quarter. The primary cause for the growth
in salary and benefit expense was the increase of full-time equivalent employees from 132 at
March 31, 2004 to 137 at March 31, 2005, as well as increases in the defined-benefit pension
plan and medical insurance expense, and customary annual salary increases. The growth in
full-time equivalent employees primarily reflects the May 2004 opening of the Bealeton
branch and the growth in lending. Net occupancy expenses increased $21,000 or 10% from the
March 2004 quarter to the March 2005 quarter reflecting the occupancy expenses of the
Bealeton branch that were absent in the beginning of 2004. Furniture and equipment expenses
increased $18,000 or 6.0% over the same time period, reflecting the increase in computer
software depreciation and related maintenance contracts. The $68,000 or 5.3%
decline in other operating expenses primarily reflects the approximate $90,000 per quarter
reduction in merchant card operating expenses previously discussed in TOTAL OTHER INCOME.
In addition, TFB completed the renegotiation of its contract with its data processing
service provider effective July 18




---



##### 



2004. This renegotiated contract is projected to reduce TFBs operating expenses by
approximately $250,000 annually through 2009. These decreases in other operating expenses
were partially offset by an increase in legal and accounting fees that can be primarily
attributed to meeting the requirements of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley).
 
Management expects the costs associated with Sarbanes-Oxley compliance to increase during
the remainder of 2005 in connection with implementing the requirements of Section 404
regarding Managements Report on Internal Controls. Bankshares projects that the aggregate
market value of its common stock held by non-affiliates will reach the $75 million as of
June 30, 2005, and that it will therefore be required to comply with Section 404 for
December 31, 2005. TFB expects salary and benefits to continue to be its largest other
expense. As such, the most important factor with regard to potential changes in other
expenses is the expansion of staff. The cost of any additional staff expansion, however,
would be expected to be offset by the increased revenue generated by the additional services
that the new staff would enable TFB to provide. For the remainder of 2005, TFB projects to
increase staff from its current levels by approximately five full-time equivalent personnel. COMPARISON OF MARCH 31, 2005 AND DECEMBER 31, 2004 FINANCIAL CONDITION Assets totaled $447.4 million at March 31, 2005, an increase of 4.2% or $18.2 million from
$429.2 million at December 31, 2004. Balance sheet categories reflecting significant changes
include cash and due from banks, loans, federal funds sold, and deposits. Each of these
categories is discussed below. CASH AND DUE FROM BANKS.At March 31, 2005, cash and due from banks totaled $16.6 million,
reflecting an increase of $7.6 million from $8.9 million at December 31, 2004. The increase
in cash and due from banks was the result of temporarily increasing TFBs deposits with the
Federal Reserve Bank of Richmond in order to satisfy reserve requirements. LOANS.Net loans were $344.0 million at March 31, 2005, which is an increase of $6.2 million
or 1.8% from $337.8 million at December 31, 2004. The growth in total loans is primarily
attributable to an increase of $7.9 million in commercial and industrial loans and an
increase of $4.5 million in mortgage loans collateralized by 1-to-4 family residential real
estate, partially offset by a $3.1 million decrease in mortgage loans collateralized by
non-residential real estate. TFBs loans are made primarily to customers located within
TFBs primary market area. During 2003, TFB modified its loan pricing strategies and
expanded its loan product offerings in an effort to increase lending activity without
sacrificing existing credit quality standards. This change in pricing strategy was the
primary reason for the increase in loans outstanding over the last 24 months. Management
will continue to utilize the same pricing strategies for the remainder of 2005, but due to
competitive pricing below TFBs rate of return targets, total loan originations may decrease
when compared with 2003 and 2004, particularly in the category of 1-to-4 family first
mortgage loans. FEDERAL FUNDS SOLD.Federal funds sold were $7.3 million at March 31, 2005, compared to
federal funds sold of $0.1 million at December 31, 2004. 19




---



##### 



DEPOSITS. At March 31, 2005, total deposits were $385.6 million, reflecting an increase
of $11.0 million or 2.9% from $374.7 million at December 31, 2004. The growth was
attributable to growth in noninterest-bearing deposits, which increased $11.2 million,
partially offset by a $0.25 million decline in interest-bearing deposits. TFB expects to increase its
deposits in 2005 and beyond through the continued expansion of its branch network, as well
as by offering value-added demand deposit products, and selective rate premiums on
interest-bearing deposits. ASSET QUALITY Non-performing assets, in most cases, consist of loans that are 90 days or more past due and
for which the accrual of interest has been discontinued. Management evaluates all loans that
are 90 days or more past due, as well as loans that have suffered financial distress, to
determine if they should be placed on non-accrual status. Factors considered by management
include the estimated
value of collateral, if any, and other resources of the borrower that may be available to
satisfy the delinquency. Non-performing assets totaled $378,000 or 0.11% of total loans at
March 31, 2005, as compared with $183,000, or 0.05% of total loans at December 31, 2004, and
$1.03 million, or 0.33% of total loans at March 31, 2004. The provision for loan losses was
$125,000 for the first three months of 2005 compared with $154,000 for the first three
months of 2004. The 18.9% decrease in the provision for loan losses from first quarter 2004
to first quarter 2005 was largely in response to the decline in non-performing assets,
partially offset by the growth in new loan originations during the last 12 months. Loans
that are 90 days past due and accruing interest totaled $271,000 and $162,000 at March 31,
2005 and December 31, 2004, respectively. No loss is anticipated on these loans based on the
value of the underlying collateral and other factors. There are no loans, other than those
disclosed above as either non-performing or impaired, where known information about the
borrower has caused management to have serious doubts about the borrowers ability to repay
the loan. There are also no other interest-bearing assets that would be subject to
disclosure as either non-performing or impaired if such interest-bearing assets were loans.
The largest concentrations of loans to borrowers engaged in similar activities are $25.4
million for hotel/motel/inn loans, $24.2 million for land development loans, and $11.1
million for child care facility loans. These three loan concentrations represent 7.3%, 6.9%,
and 3.2% of total loans, respectively. CONTRACTUAL OBLIGATIONS As of March 31, 2005, there have been no material changes outside the ordinary course of
business to the contractual obligations disclosed in Managements Discussion and Analysis
in Bankshares Annual Report on Form 10-K for the year ended December 31, 2004. OFF-BALANCE SHEET ARRANGEMENTS As of March 31, 2005, there have been no material changes to the off-balance sheet
arrangements disclosed in Managements Discussion and Analysis in Bankshares Annual
Report on Form 10-K for the year ended December 31, 2004. CAPITAL RESOURCES Total shareholders equity was $32.5 million at March 31, 2005 compared to $31.9 million at
December 31, 2004, an increase of $0.6 million, or 2.0%. The increase in the accumulated
other comprehensive loss component of shareholders equity from December 31, 2004 to March
31, 2005 reduced shareholders equity by $0.5 million or 1.6%. 20




---



##### 



Bankshares shareholders equity was reduced $10,000 due to the repurchase of 397 shares of
common stock at an average cost of $24.71 during the first three months of 2005. In
addition, 30,926 shares of Bankshares common stock were newly issued at an average price of
$8.64 in connection with stock option exercises under Bankshares stock option plans during
the first three
months of 2005 for a total addition to shareholders equity of $267,000. During July 2004,
Bankshares instituted a voluntary dividend reinvestment plan (DRIP) through which
shareholders may purchase shares of common stock through the automatic reinvestment of their
dividends. Additionally through the DRIP, shareholders are also given the opportunity to
purchase additional shares of common stock up to specified dollar amount limits. The DRIP
may either buy existing shares in the open market, or issue newly outstanding shares in
order to fulfill its reinvestment needs. Bankshares currently has registered 250,000 shares
of common stock for issuance under the DRIP. For the quarter ending March 31, 2005,
Bankshares issued 1,374 newly outstanding shares through the DRIP at an average price of
$24.72 for a total addition to shareholders equity of $34,000. Banking regulations have established minimum capital requirements for financial
institutions, including risk-based capital ratios and leveraged ratios. Under these
guidelines, the $4.0 million of capital securities issued by Bankshares subsidiary trust
are treated as Tier 1 capital for purposes of the Federal Reserves capital guidelines for
bank holding companies, as long as the capital securities and all other cumulative preferred
securities of Bankshares together do not exceed 25% of Tier 1 capital. At both March 31,
2005 and December 31, 2004, Bankshares and TFB exceed their minimum regulatory capital
ratios. The following table sets forth the regulatory capital ratio calculation for
Bankshares: REGULATORY CAPITAL RATIOS March 31, 2005
    
    
    December 31, 2004Tier 1 Capital:Shareholders Equity
    
    $
    32,534
    
    
    $
    31,891Plus: Unrealized loss on securities available for sale
    
    
    536
    
    
    
    46Less: Intangible assets, net
    
    
    (51
    )
    
    
    (58
    )Plus: Company-obligated madatorily redeemable capital securities
    
    
    4,000
    
    
    
    4,000Total Tier 1 Capital
    
    
    37,019
    
    
    
    35,879Tier 2 Capital:Allowable Allowance for Loan Losses
    
    
    4,126
    
    
    
    4,060Total Capital
    
    $
    41,145
    
    
    $
    39,939Risk Weighted Assets:
    
    $
    336,884
    
    
    $
    330,177Regulatory Capital Ratios:Leverage Ratio
    
    
    8.41
    %
    
    
    8.30
    %Tier 1 to Risk Weighted Assets
    
    
    10.99
    %
    
    
    10.87
    %Total Capital to Risk Weighted Assets
    
    
    12.21
    %
    
    
    12.10
    %
 21




---



##### 





LIQUIDITY

The primary sources of funds are deposits, repayment of loans, maturities of
investments, funds provided from operations and advances from the FHLB of Atlanta. While
scheduled repayments of loans and maturities of investment securities are predictable
sources of funds, deposit flows and loan repayments are greatly influenced by the general
level of interest rates, economic
conditions and competition. TFB uses its sources of funds to fund existing and future
loan commitments, to fund maturing certificates of deposit and demand deposit withdrawals,
to invest in other interest-earning assets, to maintain liquidity, and to meet operating
expenses. Management monitors projected liquidity needs and determines the desirable funding
level based in part on TFBs commitments to make loans and managements assessment of TFBs
ability to generate funds. Cash and amounts due from depository institutions,
interest-bearing deposits in other banks, and federal funds sold totaled $24.0 million at
March 31, 2005 compared with $9.2 million at December 31, 2004. These assets provide the
primary source of liquidity for TFB. In addition, management has designated the entire
investment portfolio as available for sale, of which approximately $39.6 million is
unpledged and readily salable. Futhermore, TFB has an available line of credit with the FHLB
of Atlanta with a borrowing limit of approximately $134.2 million at March 31, 2005 to
provide additional sources of liquidity, as well as federal funds borrowing lines of credit
with various commercial banks totaling approximately $42.8 million. At March 31, 2005, $23.0 million of the FHLB of Atlanta line of credit was in use.

The following table sets forth information relating to Bankshares sources of liquidity and
the outstanding commitments for use of liquidity at March 31, 2005 and December 31, 2004.
The liquidity coverage ratio is derived by dividing the total sources of liquidity by the
outstanding commitments for use of liquidity.

LIQUIDITY SOURCES AND USES
(In Thousands)

March 31, 2005
    
    

December
31, 2004**Total
    
    
    In Use
    
    
    Available
    
    
    Total
    
    
    In Use
    
    
    AvailableSources:Federal funds borrowing lines of credit
    
    $
    42,806
    
    
    $
    
    
    
    $
    42,806
    
    
    $
    37,800
    
    
    $
    
    
    
    $
    37,800Federal Reserve discount window
    
    
    322
    
    
    
    
    
    
    
    322
    
    
    
    369
    
    
    
    
    
    
    
    369Federal Home Loan Bank advances*
    
    
    81,650
    
    
    
    23,000
    
    
    
    58,650
    
    
    
    80,658
    
    
    
    15,000
    
    
    
    65,658Federal funds sold
    
    
    
    
    
    
    
    
    
    
    7,292
    
    
    
    
    
    
    
    
    
    
    
    109Securities, available for sale and unpledged
at fair value
    
    
    
    
    
    
    
    
    
    
    41,819
    
    
    
    
    
    
    
    
    
    
    
    47,232Total short-term funding sources
    
    $
    124,778
    
    
    $
    23,000
    
    
    $
    150,889
    
    
    $
    118,827
    
    
    $
    15,000
    
    
    $
    151,168Uses:Unfunded loan commitments and lending lines of credit
    
    
    
    
    
    
    
    
    
    $
    90,379
    
    
    
    
    
    
    
    
    
    
    $
    71,612Letters of credit
    
    
    
    
    
    
    
    
    
    
    11,676
    
    
    
    
    
    
    
    
    
    
    
    11,343Total potential short-term funding uses
    
    
    
    
    
    
    
    
    
    $
    102,055
    
    
    
    
    
    
    
    
    
    
    $
    82,955Ratio of short-term funding sources to
potential short-term funding uses
    
    
    
    
    
    
    
    
    
    
    147.9
    %
    
    
    
    
    
    
    
    
    
    
    182.2
    %




---

*
  
  Represents the Lendable Collateral Value of blanket lien with the FHLB of Atlanta as of the period date. TFBs line of credit
with the FHLB of Atlanta had a borrowing limit of $134.2 million and 127.4 million at March 31, 2005 and December 31, 2004,
respectively. Additional collateral would be required to be added to the blanket lien for total borrowings in excess of Lendable
Collateral Value.**
  
  These figures differ from those shown in the Liquidity Sources and
Uses Table in Managements Discussion and Analysis in
Bankshares Annual Report on Form 10-K. The figures for
December 31, 2004 included in the 10-K were the total available
line of credit with the FHLB of Atlanta rather than the Lendable
Collateral Value, which Bankshares believes is the more relevant
figure. 22




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##### 



Management is not aware of any market or institutional trends, events or uncertainties
that are expected to have a material effect on the liquidity, capital resources or
operations of Bankshares or TFB. Nor is management aware of any current recommendations by
regulatory authorities that would have a material effect on liquidity, capital resources or
operations. TFBs internal sources
of such liquidity are deposits, loan and investment repayments, and securities available for
sale. TFBs primary external source of liquidity is advances from the FHLB of Atlanta. RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board issued Statement No. 123R
(revised 2004), Share-Based Payment, (FAS 123R) that addresses the accounting for
share-based payment transactions in which a company receives employee services in exchange
for either equity instruments of the company or liabilities that are based on the fair
value of the companys equity instruments or that may be settled by the issuance of such
equity instruments. FAS 123R eliminates the ability to account for share-based
compensation transactions using the intrinsic method and requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in the consolidated
statement of income. The effective date of FAS 123R (as amended by the SEC) is for annual
periods beginning after June 15, 2005. The provisions of FAS 123R do not have an impact on
Bankshares results of operations at the present time. In March 2005, the SEC issued Staff Accounting Bulleting No. 107 (SAB 107). SAB 107
expresses the views of the SEC staff regarding the interaction of FAS 123R and certain SEC
rules and regulations and provides the SEC staffs view regarding the valuation of
share-based payment arrangements for public companies. SAB 107 does not impact Bankshares
results of operations at the present time. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes to the quantitative and qualitative disclosures made in
Bankshares Annual Report on Form 10-K for the year ended December 31, 2004. ITEM 4. CONTROLS AND PROCEDURES Bankshares maintains a system of disclosure controls and procedures that is designed to
ensure that material information is accumulated and communicated to management, including
Bankshares chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure. As required, management, with the
participation of Bankshares chief executive officer and chief financial officer, evaluated
the effectiveness of the design and operation of Bankshares disclosure controls and
procedures as of the end of the period covered by this report. Based on this evaluation,
Bankshares chief executive officer and chief financial officer concluded that Bankshares
disclosure controls and procedures were operating effectively to ensure that information
required to be disclosed by Bankshares in reports that it files or submits under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and
reported within the time periods specified in the Commissions rules and forms. Because of the inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that Bankshares disclosure controls and procedures will detect
or uncover every situation involving the failure of persons within the company or its
subsidiary to disclose material information otherwise required to be set forth in
Bankshares periodic reports. 23




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Bankshares management is also responsible for establishing and maintaining adequate
internal control over financial reporting to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. There were no
changes in Bankshares internal control over financial reporting during the quarter ended
March 31, 2005 that have materially affected, or are reasonably likely to materially
affect, Bankshares internal control over financial reporting. Part II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no pending or threatened
legal proceedings to which Bankshares or TFB is a party or to which the property of either
Bankshares or TFB is subject that, in the opinion of management, may materially impact the
financial condition of either company. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Issuer Purchases of Equity Securities Total
    
    
    Average
    
    
    Total Number of
    
    
    Maximum NumberNumber of
    
    
    Price
    
    
    Shares Purchased
    
    
    of Shares that MayShares
    
    
    Paid per
    
    
    as Part of Publicly
    
    
    Yet Be PurchasedPurchased
    
    
    Share
    
    
    Announced Plan
    
    
    Under the Plan(1)(1)January 1 - 31, 2005
    
    
    397
    (2)
    
    $
    24.71
    
    
    
    
    
    212,745February 1 - 28, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,745March 1 - 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,745Total
    
    
    397
    (2)
    
    $
    24.71
    
    
    
    
    
    212,745
   (1)
    In September 1998, Bankshares announced an open market buyback program for its
common stock. Initially, the plan authorized Bankshares to repurchase up to 73,672
shares of its common stock through December 31, 1999. Each year, the Board resets the
amount of shares authorized to be repurchased during the year under the buyback
program. On May 20, 2004, the Board authorized Bankshares to repurchase up to 264,325
shares (8% of the shares of common stock outstanding on January 1, 2003) beginning
January 1, 2003 and continuing until the next Board reset. Bankshares has repurchased
52,374 shares under the current program from January 1, 2003 through March 31, 2005.(2)
    The number of shares purchased includes 397 shares tendered to the Company in
payment of the exercise price of certain options. 24




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ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS  3.1
    Articles of Incorporation of Fauquier Bankshares, Inc., as amended,
incorporated by reference to Exhibit 3(i) to registration statement on Form 10 filed
April 16, 19993.2
    Bylaws of Fauquier Bankshares, Inc., incorporated by reference to
Exhibit 3(ii) to registration statement on Form 10 filed April 16, 1999Certain instruments relating to capital securities not being registered have been
omitted in accordance with Item 601(b)(4)(iii) of Regulation S-K. The registrant
will furnish a copy of any such instrument to the Securities and Exchange
Commission upon its request.  10.1.1
    Form of Restricted Stock Grant Agreement for Employee, incorporated by
reference to Exhibit 10.1.1 to Form 8-K filed February 16, 2005.10.1.2
    Form of Restricted Stock Grant Agreement for Non-Employee Director,
incorporated by reference to Exhibit 10.1.2 to Form 8-K filed February
16, 2005.10.1.3
    Amendment and Termination of Agreement, dated April 21, 2005, between
The Fauquier Bank and C. Hunton Tiffany, incorporated by reference to
Exhibit 10.4.1 to Form 8-K filed April 26, 2005  10.14
    Employment Agreement, dated January 19, 2005, between Fauquier Bankshares,
Inc., The Fauquier Bank and Randy K. Ferrell, incorporated by reference to Exhibit
10.14 to Form 10-K filed March 30, 2005.10.15
    Fauquier Bankshares, Inc. Supplemental Executive Retirement Plan, effective
January 1, 2005, incorporated by reference to Exhibit 10.15 to Form 10-K filed March
30, 2005.11
    Refer to Part I, Item 1, Footnote 5 to the Consolidated Financial Statements.31.1
    Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)31.2
    Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)32.1
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Executive Officer32.2
    Certification Pursuant to 18 U.S.C. Section 1350 of Chief Financial Officer99
    Report of Independent Registered Public Accounting Firm 25




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized. FAUQUIER BANKSHARES, INC. 
          (Registrant) Date: May 13, 2005
    
    /s/ Randy K. FerrellRandy K. FerrellPresident and Chief Executive Officer(principal executive officer)Date: May 13, 2005
    
    /s/ Eric P. GraapEric P. GraapSenior Vice President and Chief Financial Officer(principal financial and accounting officer)
 26